Avoid Deal Killers in Business Real Estate
As a physician owner making an attempt to expand your brand or simply set up your first clinic, real estate can be one of the biggest obstacles to overcome on your journey to opening your clinic doors. There are several ways that a deal can be “killed,” and The Ambulatory M&A Advisor brings to light some of the major deal killers in real estate transactions, and how they can potentially be avoided.
Nathan Palmer, vice president of National UC Realty provides several reasons for major deal killers in real estate transactions.
“Honestly, a big one is that in today’s world, price is important in the balance of the economics between the required rent commitments versus the value of the space, versus the TI, versus the amount of landlord improvement,” Palmer says. “Really, how that all parlays into many physicians and their competence level is related to how retail real estate works.”
Palmer says that while working to help physicians understand that for a slightly higher price point, the physician can have better visibility, better signage, better exposure, some physicians decline due to the higher cost. Palmer says it is very typical to see people who will sacrifice taking the right space to save money.
“Sometimes it is too expensive, at some point, you have to draw the line, but many times, especially in the smaller units, these companies don’t really have somebody on board who can relate real estate costs to required patient traffic,” Palmer says.
Deeni Taylor, executive vice president at Duke Realty explains that just the overall lease structure can be a deal killer.
“Retail developers are not normally familiar with medical development, so the lease structure itself may be pretty difficult for a physician to go into a strip center or something like that just because retail developers have not had experience working with physicians,” Taylor says.
According to Taylor, if a physician is going into a retail setting, one of the best things that a physician could do is perform the proper research as to what they will need to properly understand the structure of a lease before jumping into it.
“Sometimes physicians try to negotiate their own leases. They don’t have the market knowledge, they don’t have the awareness of what other retail settings are doing,” Taylor says. He adds that if seller decides to work with a broker they should look into working with someone who has specific expertise in the field.
Palmer adds that another big factor that is becoming more and more prevalent, especially in the smaller start up phase is financing.
“A lot of these deals came with the doc or a group of people going to the bank or going to an equity group. People can work with an equity group to work on expansions or investment in their company, so suddenly, to make all of that work; the equity group cares about the location of the clinic based on the amount of money being put into it,” Palmer says.
Palmer says that physicians often find themselves running into a situation where a deal has been negotiated and in the time they are doing their diligence on their financing, whether it’s through conventional methods at a bank or through groups, several deals have died because financing did not come through.
Palmer explains that this is why a buyer needs to have all of their ducks in a row when it comes to understanding and planning out your financial strategy. If the financing is too lengthy a course, another vendor can easily take your spot out from under you.
“I can’t say how many deals we have lost to other retailers because we weren’t able to get the deal done fast enough. That could have been through delays which may have been the tenants fault, and may not have. But, many deals have disappeared because somebody that is a little more desirable or credit worthy came in and took the space,” Palmer says.
“Some things are certainly out of your control. You can’t prevent other companies from booking the space, but obviously, the better prepared people, the more educated companies who understand the backbones of real estate cost and allowance, and market saturation have a leg up. A lot of deals don’t have to die, had people been a little more educated or had engaged with people who help provide that color and help people understand what is normal. A lot of these guys get into this with unrealistic expectations.”
Taylor says that understanding your goal with your clinic will also help prevent the killing of a deal that may have an unexpected price tag.
“Their tenant improvement allowance may not be very much in a retail setting. That is typical. So, they have got to go out and finance or take their own capital and pay for the overage to build out the space. They may or may not know what that cost may be early on in the negotiation of their lease if the space isn’t built out yet. They can be surprised when it’s time to move in and they find out how costly it could be to build out that space and the check they are going to have to write,” he says.
Jay Crandall, owner/broker of Crandall Commercial Group, LLC, (CCG) says a lack of integrity can be like wielding a sharpened ax against any good will established between negotiating parties. Crandall refers to an example when a Tenant and their representation attempted, in the final hour of a negotiation, to change an agreement without letting the Landlord or CCG know.
“It occurred at the signing table right as the lease document was being exchanged between the Tenant/Tenant’s broker and Landlord/CCG. CCG had sent the final iteration of the document to be reviewed after all language in the documents had been approved by both parties . . . and just prior to both parties meeting to sign the deal. As our client (Landlord) was signing off, we realized the personal guarantee agreed to had been unscrupulously/intentionally changed to a corporate guarantee by the prospective Tenant and his broker. The deal fell apart at the table,” Crandall says. “The check was in hand . . . but as soon as the Landlord realized what the prospective Tenant had done, the Landlord backed out of the long term deal completely, saying, ‘If you’re willing to do this now, I don’t know what else you are going to pull in the next 5 to 7 years.'”
Crandall also adds it is not unusual for many health professionals to try to continue to renegotiate long after terms and conditions have been established. Early in the negotiations, both parties should know and understand the complete deal on the table. Crandall advises that both parties closely examine the deal in total, making sure it benefits both the Seller/Landlord and Buyer/ Tenant.
Crandall says that what happens is, from a landlord perspective, or vice versa, both parties want to know what the complete deal is. He advises that both parties closely examine the deal in total and come back and figure out if the deal in itself in the way that it stands in total is a good deal.
“If one party attempts to negotiate or renegotiate piecemeal, the deal typically falls apart. One party begins to get fatigued . . . when they realize they have conceded points believing they were done or unaware more changes were coming. When one party continues to negotiate unilaterally (which is almost never to both party’s best interest), the deal needs to either back up to an earlier point in the negotiations and move forward from there or, more often then not, the deal is terminated,” Crandall says.
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